By NEIL HARTNELL
Tribune Business Editor
The web shop industry yesterday warned that 2,000 jobs will be lost, and 75 per cent of its locations will close, if the Government follows through with aggressive triple-digit tax hikes.
The Bahamas Gaming Operators Association, the sector body, intensified its fight against the Minnis administration’s new ‘sliding scale’ tax structure by producing a study showing that the main casualties of the so-called “wipe out” will be ordinary Bahamians - its employees and patrons.
The research, by 10-year gaming industry veteran and accountant, Gavin Hamilton, warned that the tax ‘grab’ will generate much less than the $35 million anticipated revenue increase while producing unintended consequences counter to the intent behind the sector’s 2015 ‘legalisation’.
He suggested that the increases, and their impact on the seven licensed web shop chains, would drive 30 per cent of the industry’s existing customer base to an ‘underground black market’ which already accounts for 15 per cent of domestic gaming business.
Mr Hamilton’s report, ‘Review of the Gaming House Operator (Amendment) Regulations 2018’, said the revised tax structure would place the Bahamas’ gaming industry as “among the highest taxed” in the world.
It added that the inevitable industry response would be a mass downsizing of staff and physical premises, with the impact spreading far beyond the immediate industry to include landlords, the Government’s revenues and other businesses. In particular, the study suggested the industry’s marketing spend would fall by 30 per cent.
“We estimate that in order to restore profitability to the existing retail estates, there will be job losses of 2,000 jobs; store closures of up to 192 venues; a reduction of marketing spend by around 30 per cent in line with the decline in market size,” the report said.
“The net impact of this is that the overall tax take will increase by only $27 million, equivalent to a 26 per cent flat tax today, but at the cost of significant loss of employment and a backward step towards a large unregulated market, the very thing the original 2014 regulations were introduced to avoid.
“We strongly urge that the Government reconsiders the current proposals before it does long-term and irreversible damage to a vibrant, regulated market that provides significant employment in the region.”
In percentage terms, the study suggests that 71.4 per cent of the web shop industry’s total workforce, and almost three-quarters of its current 257 locations, will be lost as a result of the Minnis administration’s determination to fill a $400 million ‘gap’ in its Budget revenues. It adds that the Government’s tax take is likely to be “35 per cent lower than anticipated”.
The Government, though, has given every indication that it views the web shop industry as a tempting tax target, with the new ‘sliding scale’ structure designed to double its annual tax take from a sector that also includes the foreign-owned casinos.
They have not been subjected to such a tax structure, but K P Turnquest, Deputy Prime Minister, has made clear the Government’s position that web shops must contribute more to the Treasury given the perceived anti-social effects of gaming - especially the sucking of money out of Family Island communities, and the redistribution of wealth into the hands of a few in Nassau.
Sebas Bastian, Island Luck’s principal, declined to comment yesterday on whether the industry will meet with the Government after its attorney, Alfred Sears QC, last week issued a seven-day ultimatum for it to negotiate with the Association or face legal action. That deadline expires tomorrow, and the Hamilton report’s release suggests there has yet to be a meeting of minds.
The research reiterated that the Government’s tax rises were counter-productive, and threaten to drive domestic gaming back into the illegal ‘black market’ where it thrived prior to legalisation. Mr Sears’ letter warned that such developments could subject the Bahamas to additional scrutiny by the international bodies that have previously ‘blacklisted’ its financial services industry for alleged regulatory weaknesses.
“Precedent from international studies shows that the higher the tax rate, the lower the ‘capture’ rate,” the Hamilton report said. “Customers are likely to move to black market operators where black market operators can offer better prices (higher rebates, lower take out rates)
“The rule of thumb used is that the percentage of the market that will switch to the black market, or substitute for other products, is equal to the overall tax rate. At an effective average rate of 44 per cent, this suggests that the market will decline by 30 per cent following the tax increases (the black market already accounts for 15 per cent).”
Thus the web shop industry’s argument is that the Government’s ‘tax grab’ will result in exactly the opposite of what it intends - revenues below expectations; increased unemployment; and an industry that has either been driven largely online or into the ‘black market’.
The Hamilton report estimated that, presently, employee costs account for almost 50 per cent of the web shop industry’s fixed costs. It pegged collective industry profits at around $47 million, with profit margins at 24 per cent - a ratio the report said was “in line with the benchmark for other listed gambling operators” once taxes were factored in.
With domestic gaming industry employment levels almost three times’ higher per capita than markets such as the UK, the Association-commissioned research said the revised tax structure would make the Bahamas’ tax rate “24 per cent higher than world average”.
“The increasing tax rate penalises scale, and gives small operators an unfair cost advantage,” the Hamilton Report added. “This risks having unintended consequences, as nobody will be able to reach a scale that permits them to generate an economic return, which will make the market fragile and risk reckless behaviour by sub-scale operators.
“The only way existing licensees can react is through aggressive cost-cutting, which will fall firstly on employees and premises rationalisation.”
The present tax structure requires web shop operators to pay 11 per cent on taxable revenue or 25 per cent of EBITDA (earnings before interest, taxation, depreciation or amortisation), whichever is greater.
However, under the proposed new ‘sliding scale’ they will pay:
- Up to $20 million in revenue, a rate of 20 per cent.
- Between $20 million and $40 million, a rate of 25 per cent.
- Between $40 million and $60 million, a rate of 30 per cent.
- Between $60 million and $80 million, a rate of 35 per cent.
- Between $80 million and $100 million, a rate of 40 per cent.
- Over $100 million, a rate of 50 per cent.
And, in a nasty twist as far as web shop operators are concerned, the Government has also imposed new taxation on gamblers themselves rather than the sector. Patrons, from July 1, will have to pay a 5 per cent Stamp Tax on both their web shop deposits and non-online games/digital sales.
The Hamilton report said the effect of all this will be to increase the web shop industry’s effective tax rate to 44 per cent of gross gaming revenues (GGR), which it branded “among the highest taxes payable in the world”.
“This has significant risks,” it added. “The increase in tax take will be offset by a large migration of customers from the regulated market to the untaxed, unregulated market. We estimate the market will decrease by up to 30 per cent.
“Tax take likely to be 45 per cent lower than anticipated when market reduction and spill-over impact on NIB contributions, venue licence fees taken into account. Customers will be forced to the unregulated market, which will not be subject to the same levels of oversight in protecting the vulnerable and preventing crime.”
Tackling claims by Mr Turnquest that gaming taxes were as high as 80 per cent in some jurisdictions, the report said this only applied to monopolies such as the UK’s national lottery.
“In contrast, the proposed progressive tax rate structure (up to 72 per cent marginal effective rate) makes it impossible for Bahamian operators to absorb increased taxes through increased scale, as smaller operators have a material cost advantage through lower taxes,” the Hamilton report added.
“Our analysis suggests that the rate of increase is from a low of 238 per cent to a high of 453 per cent - materially higher than publicly disclosed. Multiple international studies have shown that punitive taxes drive customers into the unregulated, black market, where they are far more likely to fall victim to unscrupulous operators.”